Arab Monetary Fund releases April edition of the Arab Economic Outlook

According to an optimistic COVID-19 scenario, the growth of the Arab economies will halve in 2020, while an extended recession is expected based on a pessimistic scenario 

The deficit of the consolidated Arab budget will double in 2020 in light of increased public spending and declining oil and tax revenues 

The current account surplus of the Arab economies recorded in 2019 will turn into a deficit in 2020 due to the decline in exports and income receipts 

In line with its continuous efforts to support policymakers in the Arab region, the Arab Monetary Fund (AMF) releases the April edition of the "Arab Economic Outlook" report, which includes projections for the macroeconomic performance of the Arab countries in 2020 and 2021.

The AMF report indicated that the world and the Arab economies witness exceptional circumstances in 2020 in light of the outbreak of COVID-19 virus and its wide-scale impacts on the global supply chains, international trade, as well as consumption, investment, and industrial activities. The virus increased uncertainty levels and lowered consumer and investor confidence. The restrictions imposed on transportation are negatively impacting tourism, aviation, trade, manufacturing, and other economic sectors in many countries across the globe.

At the beginning of the year, some international institutions’ forecasts indicated that the virus's impact on the global economy would be minimal within 0.1 percentage points of the global GDP if the virus will be contained in the first quarter of 2020. However, other hypotheses suggested a further decline in the global economic activity, expecting the growth of the global economy to decline to nearly half of the expected levels before the virus outbreak. Later on, it was clear that the world economy entered a period of recession that is worse than the global financial crisis.

The report pointed out that the growth of the Arab economies reached around 2 percent in 2019, reflecting the external demand slowdown due to trade tensions between China and the United States of America, in addition to the decrease in the quantity of oil exports in a number of Arab oil-exporting countries in compliance with "OPEC+" agreement. Economic reform programs adopted in some Arab countries supported economic activities last year.

The COVID-19 will have a profound impact on the Arab economies through many channels, including the external demand, which contributes around 48 percent of the GDP of the Arab economies. In this context, both oil and non-oil exports will be impacted by the decline of the global demand, especially that the most affected countries are the main trade partners of the Arab countries receiving around 65 percent of the total Arab exports.

On the other hand, growth will be affected by the partial shutdown of some important economic sectors like tourism, transport, trade, and manufacturing as a result of the spread of the virus, which collectively contribute around 40 percent of the GDP of the Arab countries.

Additionally, Arab-exporting countries will be impacted by the developments in the international oil markets. The expected lower oil demand levels as a result of the outbreak of the virus and the continued excess supply will result in a further decline in international oil prices in 2020. Accordingly, the oil sector, which is responsible for around 27 percent of the GDP in the Arab countries, 42 percent of the total exports, and 62 percent of the total public revenues will be affected negatively.

Arab-oil importing countries will be impacted by the external demand shock, which will reduce foreign exchange receipts as a result of the expected decline in the exports of goods and services as well as the remittances which contribute more than 10 percent of the GDP in some of these countries. Subsequently, local currencies may face downward pressures in some countries that adopt flexible exchange rate regimes, which will raise the cost of external debt services.

COVID-19 negative impacts will reflect on the unemployment levels in the Arab countries which are expected to rise in 2020, especially in light of the slowdown of many job-creating sectors like for instance the tourism sector that contributes around 12 to 19 percent of the GDP in some Arab countries that are considered as international tourist destinations. The virus will also impact MSMEs, which generate about 45 percent of the GDP and around one-third of the employment in the formal sector.

As soon as the World Health Organization announced the COVID-19 as a global Pandemic, Governments of the Arab countries started to take serious actions followed by precautionary measures to limit the negative impact of its spread on Arab economies with stimulus packages reached nearly USD 180 billion (5.9 percent of the GDP) up till now.

The stimulus packages include several interventions like for instance directing more financial allocations to support the health systems, reducing interest rates by 1.5 to 3.0 percentage points, reducing legal reserve requirement ratios, injecting liquidity into the banking sector, postponing loan installments and interest due on affected individuals and SMEs for up to six months, the exemption from government services fees, as well as adopting universal basic income programs for some targeted groups.

The Arab Economic Outlook report indicated that according to a COVID-19 optimistic scenario that assumes the virus will be contained in the first half of 2020 and that there will not be a wide and extended shutdown, the growth of the Arab economies is expected to halve compared to levels forecasted before the crisis. While an recession is expected based on a pessimistic scenario assumes the virus effects will last until the end of the year. In 2021, a gradual recovery is expected in light of the anticipated improvement in the levels of global demand and the increase in international oil prices.

In 2019, the inflation rate in the Arab countries continued to decline to reach about 5.0 percent, compared to about 9.4 percent achieved in 2018. This is due to the decrease in domestic demand in some countries, the changes witnessed in the international prices of oil and raw materials, in addition to the gradual decline of inflationary pressures resulting from the fiscal reform measures implemented by some Arab countries during the past two years. In 2020, inflation rates are expected to be affected by the implications of the COVID-19 on the levels of supply and demand, and by the decrease in oil prices, while it is expected to rise in 2021 in light of the expected recovery of global and domestic demand and international oil prices.

Easing monetary policies were adopted in 2019 in some Arab countries with fixed exchange rate regimes to fully or partially cope with the Federal Reserve Board decisions, which lowered interest rates by 75 base points, while other Arab countries adopted neutral monetary policies by keeping official interest rates unchanged. The monetary stance in Arab countries with flexible exchange rates has varied as some of these countries raise the official interest rate to curb inflationary pressures, while others who benefited from the successful implementation of inflation targeting policies lowered interest rates to stimulate economic growth.

In light of COVID-19 developments, the Arab Central Banks and Monetary Authorities undertook many proactive measures. These measures are aiming at mitigating the negative impacts of coronavirus, encouraging banks to extend more credit, ensuring sufficient liquidity, and lowering debt burden on impacted economic sectors and affected segments.

Monetary policy reforms adopted in the Arab countries in the forecasting horizon will continue to focus on increasing monetary policy efficiency through developing some existing monetary policy tools, introducing new tools to ensure liquidity management, and increasing the levels of efficiency of the operational frameworks. Moreover, Central Banks' reforms in some Arab countries focus on ensuring the stability of the foreign exchange markets and enabling the banking sector to meet the challenges associated with the limited foreign exchange resources to ensure the stability of the exchange rate regimes.

On public finance, the AMF report referred to the decrease in the deficit of the Arab consolidated budget to reach 3.4 percent of the GDP in 2019 due to the successful implementation of many fiscal reforms in both Arab oil-exporting and importing countries. On the contrary, the deficit is expected to double in 2020, reflecting the increased public spending to finance stimulus packages and the anticipated decline in oil and tax revenues resulted from COVID-19, while the deficit will descend in 2021.

As for the external sector, the preliminary data for 2019 indicates that the current account balance of Arab countries as a group has been affected by changes witnessed by the international oil prices and the global demand. Especially in the euro area countries, the most prominent trading partners for several Arab countries. As a result, the surplus of the current account balance has decreased during 2019 to reach USD 42 billion, which constitutes about 1.6 percent of GDP.

In light of COVID-19, the surplus recorded in the balance of payments of Arab countries during 2019 is expected to turn into a deficit by 2020. The shift will reflect the expected drop in international oil prices. The deficit is likely to turn into a surplus next year based on the anticipated gradual global recovery.

The full version of the report is available at: https://www.amf.org.ae/sites/default/files/AEO_Apr_2020.pdf 

© Press Release 2020